Failure Is Normal in VC: Missing a Winner Can Cost More Than Backing a Loser

Investment failure is normal in VC. People often ask why well-known VCs invested in a particular deal—for example, FTX, which imploded in November 2022. Of course, the history of VC contains countless other failures. We are always learning and growing through painful lessons. My personal experience is that the impact of ‘missing out’ far exceeds that of ‘investing in the wrong company.’ If a fund has ten equally weighted investments, each represents 10% of the portfolio. Getting one wrong means losing 10%. Missing one could mean forgoing a 10–30x return, or possibly 100–1,000x in the United States. Failure is part of a VC’s everyday work. Investors are prepared for it even when making an investment. Many deals are treated from the outset as part of the denominator, because VC is not about pursuing a high success rate; it may even involve a high failure rate. But VCs fundamentally do not want to miss a good deal. This gives them a fear-of-missing-out mindset—FOMO—and a very severe case of it at that, leading them to invest at prices that are relatively high at the time. Once you understand this FOMO at the heart of VC, it becomes a little easier to see why VCs can commit to some highly valued deals. Even if those valuations may not be accepted in the secondary market, VCs still choose to believe and are willing to wait with more patience than secondary-market investors. Time is a friend to good companies, and time will ultimately do them justice. So although Facebook’s shares halved shortly after its IPO, it eventually reached a market capitalization of 1.3 trillion. We choose to believe. We are willing to wait. We are even willing to take a bet.